The U.S. Government has recently engaged in serious talks to abandon the production of the penny. Why? Because each penny costs 1.4 cents to produce, resulting in a cost of more than $100 million per year to taxpayers. If you’re a 401k investor, does this sound familiar? How so, you ask? The answer lies in knowing how much you’re paying in the hidden investment fees associated with your 401k account. Based on NerdWallet research, nearly 92% of people have no idea what they’re paying in 401k fees.

Why Paying 401k Fees Can Be a Big Deal

Fees unnecessarily sap the potential long-term results of your 401k. The average American will pay $138,336 in 401k fees. That’s 2.5 years of earnings for the average U.S. household.

When it comes to 401k accounts, target date funds (TDF) have seen massive adoption in the past ten years. Over 70% of 401k plans on the market offer some form of TDF and 60% of people in their 20s use them.1 Cerulli Associates estimates that by 2019, 90 percent of new 401k contributions will go into TDFs.2

This rapid adoption isn’t surprising. In concept, a TDF is not a horrible investment for retirement when used correctly. At first glance, they look like a solid retirement strategy. Namely, they offer simplicity and a diversified allocation that becomes more conservative the closer you get to your targeted retirement date.

But take a look at the elephant in the room when it comes to target date funds. They can be built with 100% proprietary funds, often from the same institution providing the 401k plan to the participant!

That seems a little like the fox guarding the chicken coop, doesn’t it?

Vanguard is the current market share leader, managing $224.9 billion in TDFs. They are followed by Fidelity and T. Rowe Price (as of 12/31/16, according to Morningstar Inc.’s annual Target-Date Fund Landscape report). These three firms manage more than 71% of all TDF assets, effectively controlling the industry.

We can’t deny the simplicity of a TDF. Unfortunately, you often end up paying for that simplicity in the form of the higher internal fees associated with these proprietary funds.

A Target Date Fund Case Study: Walmart’s 401k plan

For an example, let’s take a look at Walmart’s 401k plan. With 1.5 million 401k participants and $22 billion in plan assets, it is one of the country’s largest retirement plans. Given this size, Walmart can negotiate extremely low fund costs for its associates. The TDF options within their plan have internal expenses of 0.34%. That is roughly 50% of the industry average 0.71%. This makes Walmart’s plan one of the best-case scenarios for TDFs when it comes to expense.

Yet even in this “best-case scenario” of comparatively low expense ratios, a Walmart employee can do better.

In the interview, Chris gives an update on recent pricing changes and service offering enhancements at blooom. First, Chris discusses the reasons for the shift toward the low, flat rate of $10 a month.

In addition to the retirement account automation, we also now offer financial planning advice to our clients. They can chat with a representative with financial questions or important decisions. Chris and Rob discuss the feature and how the reasons for blooom’s founding helped shape the advice service offering. Regardless of whether it’s tough choices when saving for a college or deciding on a home purchase or refinance, we can help.

First, let me give this disclaimer: Target Date Funds are a great solution if the alternative is leaving your retirement money in a Money Market Fund. That said, there are three problems with almost all Target Date Funds inside of employer sponsored retirement accounts (like 401k and 403b plans).

What is a Target Date Fund?

Target Date Funds were meant to it simple to invest for a specific date in the future – like the year you retire. In theory, an investor can select the Target Date Fund with the year closest to when they are planning/hoping to retire. For example, a 35 year old planning to retire at age 60 might select a 2040 Target Date Fund. This single fund election is comprised of a few individual Mutual Funds to give instant diversification across asset categories: Large Company Stocks, Small Company Stocks, International Stocks, Bonds, Money Market, etc. Target Date Funds automatically adjust the risk profile of the fund (the weighting of stocks vs. bonds) inside the portfolio as the years progress. So, a 2040 Target Date Fund may have 80-90% of the portfolio in stocks, but by 2039 it will likely have adjusted the ratio closer to 50% stocks and 50% bonds/money market. This happens automatically for the investor, without them doing anything on their own. In theory, it seems fairly intuitive and a decent strategy for retirement saving. Now let’s discuss the shortcomings.